In: Accounting
A production manager needs to develop a production schedule to meet the following demand:
Period | 1 | 2 | 3 | 4 | 5 | 6 |
Demand | 600 | 600 | 800 | 1000 | 1200 | 600 |
Productions costs are as follows: (a) regular time: $3 per unit. (b) over-time: $5 per unit. (c) subcontract: $7 per unit. (d) Inventory carrying cost = $2 per unit per period (e) Back-order costs = $5 per unit per period.
Suppose some workers have retired, and the regular production
rate can be only 700 units per period. Further, no subcontracting
is allowed. However, it is possible to schedule production on an
over-time basis
.
We can calculate the cost in 2 scenarios:
Scenario 1 - No inventory carried forward. Inventory produced to meet demand with over-time hours
Scenario 2 - Inventory carried forward. Inventory produced with over-time hours only for differential to demand
Subcontract cost is not relevant since subcontracting is not allowed.
Back-order cost is not helpful since demand is with gradual increase and can only be fulfilled by overtime.
Scenario 1 - No inventory carried forward. Inventory produced to meet demand with over-time hours
Period | 1 | 2 | 3 | 4 | 5 | 6 | Total |
Demand | 600 | 600 | 800 | 1000 | 1200 | 600 | 4800 |
Regular Production | 600 | 600 | 700 | 700 | 700 | 600 | 3900 |
Overtime Production | 0 | 0 | 100 | 300 | 500 | 0 | 900 |
4800 | |||||||
Regular Time Rate | $ 3 | $ 3 | $ 3 | $ 3 | $ 3 | $ 3 | |
Regular Cost | $ 1,800 | $ 1,800 | $ 2,100 | $ 2,100 | $ 2,100 | $ 1,800 | $ 11,700 |
Regular Time Rate | $ 5 | $ 5 | $ 5 | $ 5 | $ 5 | $ 5 | |
Regular Cost | $ - | $ - | $ 500 | $ 1,500 | $ 2,500 | $ - | $ 4,500 |
Total Cost | $ 1,800 | $ 1,800 | $ 2,600 | $ 3,600 | $ 4,600 | $ 1,800 | $ 16,200 |
Scenario 2 - Inventory carried forward. Inventory produced with over-time hours only for differential to demand
Period | 1 | 2 | 3 | 4 | 5 | 6 | Total |
Demand | 600 | 600 | 800 | 1000 | 1200 | 600 | 4800 |
Inventory Balance C/F | 100 | 200 | 100 | 0 | 0 | 0 | 400 |
Regular Production | 700 | 700 | 700 | 700 | 700 | 600 | 4100 |
Overtime Production | 0 | 0 | 0 | 200 | 500 | 0 | 700 |
4800 | |||||||
Regular Time Rate | $ 3 | $ 3 | $ 3 | $ 3 | $ 3 | $ 3 | |
Regular Cost | $ 2,100 | $ 2,100 | $ 2,100 | $ 2,100 | $ 2,100 | $ 1,800 | $ 12,300 |
Regular Time Rate | $ 5 | $ 5 | $ 5 | $ 5 | $ 5 | $ 5 | |
Regular Cost | $ - | $ - | $ - | $ 1,000 | $ 2,500 | $ - | $ 3,500 |
Carrying Cost Rate | $ 2 | $ 2 | $ 2 | $ 2 | $ 2 | $ 2 | |
Carrying Cost | $ 200 | $ 400 | $ 200 | $ - | $ - | $ - | $ 800 |
Total Cost | $ 2,300 | $ 2,500 | $ 2,300 | $ 3,100 | $ 4,600 | $ 1,800 | $ 16,600 |
Based on the above calculations, Scenario 1 has lesser cost and is preferable.